The Four Types of Economic Systems - Quickonomics (2024)

Updated Jan 12, 2023

Four types of economic systems characterize most economies around the world: traditional economies, command economies, market economies, and mixed economies. All of them rely on a different set of assumptions, regulations, and conditions. And, of course, all of these economic systems have their strengths and weaknesses. We will look at each of them in more detail below.

Traditional Economic System

A traditional economic system focuses exclusively on goods and services that are directly related to its beliefs, customs, and traditions. It relies heavily on individuals and doesn’t usually show a significant degree of specialization and division of labor. In other words, traditional economic systems are the most basic and ancient type of economy.

Large parts of the world still qualify as traditional economies,primarily rural areas of second- or third-world countries, where most economic activityrevolves around farming and other traditional activities.These societies often suffer from alack of resources. Either because those resources don’t naturally occur in the region or because other, more powerful (often capitalist) economies restrict access to them.

Hence, traditional economiesare usually not capable ofgenerating the same amount of output or surplus that other types of economic systems can produce.However, the relatively primitive processes are often much more sustainable, and the low output results in much less waste than we see in any command, market, or mixed economy.

Command Economic System

A command economic system is characterized by a dominant centralized power (usually the government) that controls a large part of all economic activity. This type of economy is most commonly found in countries with a socialist or communist political system. It is sometimes also referred to as a planned economic system because most production decisions are made by the government (i.e., planned), and there is no free market at play.

Economies that have access to large amounts of valuable resources are especially likely to establish a command economy. In those cases, the government steps in to regulate the resources and most processes surrounding them (e.g., distribution). In practice, the centralized control aspect usually only covers the most valuable resources within the economy (e.g., oil, gold). Other parts, such as agriculture, are often left to be regulated by the general population and other parts of society.

A command economy can work well in theory as long as the government uses its power in the best interest of society. However, this is, unfortunately, not always the case. In addition to that, command economies are less flexible than the other systems and react slower to changes because of their centralized nature.

Market Economic System

A market economic system (also known as a market economy or capitalism) relies on free markets and does not allow any government involvement in the economy. In this system, the government does not control any resources or other relevant economic segments. Instead, the entire system is regulated by the people, and resources are allocated based on the law of supply and demand. Therefore, this system is sometimes also referred to as laissez-faire capitalism or capitalist economy.

The market economic system is a theoretical concept. That means there is no real example of a pure market economy in the real world. The reason for this is that all capitalist economies we know of show characteristics of at least some kind of government intervention, no matter how market-oriented they are. For example, many governments pass laws to regulate monopolies or to ensure fair trade, social equality, and so on.

In theory, a free market enables an economy to experience high growth rates. Arguably the highest among all four economic systems. In addition to that, capitalism also ensures that the economy and the government remain separate. At the same time, however, a capitalist system allows private actors to become extremely powerful, especially those who own valuable resources, which can cause social inequalities. Or in other words, the distribution of wealth and other positive aspects of the high economic output of a capitalist economy may not always be beneficial for society as a whole long-term.

Mixed Economic System

A mixed economic system refers to any mixture of a market economy and a command economic system. It is sometimes also referred to as a dual or mixed economy. Although there is no clear-cut definition of a mixed economic system, in most cases, the term is used to describe free market economies with strong regulation and government control in specific areas (e.g., public goods and services).

Most western economies nowadays are considered mixed economies (e.g., the U.S. economy). Most industries in those systems are privately owned, whereas a small number of public utilities and services remain state-owned. Thus, neither the private nor the government sector alone can maintain the economy; both play a critical part in the success of the system.

Mixed economies are widely considered an economic ideal nowadays. In theory, they are supposed to combine the advantages of both command and market economic systems. In practice, however, it’s not always that easy. The extent of government control varies greatly, and some governments tend to increase their power more than necessary.

Summary

In economics, four types of economic systems characterize most economies around the world: traditional, command, market, and mixed economies. A traditional economic system focuses exclusively on goods and services that are directly related to its beliefs and traditions. A command economic system is characterized by a dominant centralized power. A market economic system relies on free markets and does not allow any government involvement. Finally, a mixed economic system is any mixture of a market and a command economic system.